CIS March 2013 Exam Diet
Examination Paper 1.2:
Corporate Finance
Equity Valuation and Analysis
Fixed Income Valuation and Analysis
Corporate Finance (1 - 33)
1.
Which of the following statements is/are most correct?
A. Compensating managers with stock can reduce the agency problem between
shareholders and managers.
B. Restrictions are included in credit agreements to protect bondholders from the
agency problem that exists between bondholders and shareholders.
C. The threat of a takeover can reduce the agency problem between bondholder
and shareholders.
D. (A) and (B) above.
2.
Which of the following statements is most correct?
A. The ability of firms to engage in socially beneficial project that involves voluntary
costs is constrained by competition and the need of firms to attract capital at low
cost.
B. The actions that maximize a firm’s stock price are inconsistent with maximizing
social welfare.
C. The concepts of social responsibility and ethical responsibility on the part of
corporations are completely different and neither is relevant in maximizing stock
price.
D. In a competitive market, if a group of firms do not spend resources making
social welfare improvements, but another group does, in general, this will not
affect the second group’s ability to attract capital.
3.
A tax shield arises because:
A. Some countries do not impose taxes on either companies or individuals.
B. Interest is treated as an expense by the tax authorities in most countries.
C. Losses in previous years are deductible from the taxable income of subsequent
years.
D. The tax authorities in most countries have ‘double taxation agreements’ or
people who work in one country but are resident in the other.
4.
During a period of inflation, which one of the following equations links the money
rate of return (M) and the real rate of return (R)?
A. (1 + M) = (1 + R) x (1 + inflation rate)
B. (1 + R) = (1 + M) x (1 + inflation rate)
C. (1 + M) = (1 + R) + (1 + inflation rate)
D. (1 + R) = (1 + M) - (1 + inflation rate)
5.
KZ Ltd has the following relationship:
Sales / Total assets (ATO)
2.0
Return on assets (ROA)
4%
Return on equity (ROE)
6%
What is the company’s profit margin (PM)?
A. 2%
B. 4%
C. 8%
D. More information needed.
6.
A firm which has an equity multiplier (total assets / equity) of 4 will have a debt ratio
(total debt/total asset) of:
A. 4
B. 3
C. 1
D. 0.75
7.
A firm may impose on itself internal capital rationing for which of the following
reasons?
A. To dilute ownership.
B. To ensure efficient utilization of available funds.
C. As a strategy to grow organically.
D. (B) and (C) above.
8.
An analyst has gathered the following data about a stock:
•
•
•
•
A beta of 1.375
The actual return of 10.5%
The market rate of return is 6%
The risk-free rate 2%
What is the abnormal return of the stock?
A. 2%
B. 3%
C. 4%
D. 5%
9.
A company is currently pure equity financed. The company decides to borrow N50m
to finance an expansion project. Corporate tax rate is 40%. Which of the following is
necessarily correct after the borrowing, if you believe in M and M theory?
A. Insufficient information to provide an answer
B. Value of the company will increase by N30m
C. Value of equity will reduce by N20m
D. Value of the company will increase by N20m
10. A firm wishes to issue new preferred stock. The firm has determined that it can sell
9%, N100 par value shares for N95. The firm’s tax rate is 40%. The component cost
of preferred equity for the firm is closest to:
A. 5.7%
B. 9.0%
C. 9.5%
D. 7.5%
11. Which of the following statements is not correct about the wealth maximization
objective of a business firm?
A. It considers the principle of time value of money.
B. It takes into account risk and return.
C. It considers accounting profit.
D. It balances short and long term benefits.
12. In a particular year, $0.0100 was needed to buy N1.00. Three months later, $0.0080
was needed to buy N1.00. In the interval, which of the following statements was
correct?
A. Naira appreciated by 20%
B. Naira appreciated by 25%
C. Dollar appreciated by 25%
D. Dollar appreciated by 20%
Use the information below to answer questions 13 – 15:
Old Air Ltd has been operating for several years. Its market-determined beta is 2.0, its
market value capital structure is 80 percent debt, and tax rate is 50%. Risk-free rate is
10% and market return is 15%.
13. What is Old Air’s asset (unlevered) beta?
A. 0.67
B. 1.00
C. 1.33
D. 1.67
14. What is Old Air’s business risk premium?
A. 0.00%
B. 1.50%
C. 3.33%
D. 6.67%
15. What is Old Air’s financial risk premium?
A. 0.00%
B. 1.50%
C. 3.33%
D. 6.67%
16. According to the clientele effect of dividend policy, which of the following groups
is/are attracted to low-payout stocks?
I. Corporate investors.
II. Tax-exempt investors.
III. Wealthy individual investors.
A.
B.
C.
D.
I only.
III only.
I and II only.
All of the above.
17. ___________ is defined as the system by which companies are directed, managed
and controlled.
A. Corporate Reposition.
B. Corporate Restructuring.
C. Corporate Governance.
D. Corporate Realignment.
18. A company with a current ratio of 2.75x and a quick ratio of 1.7.5x has current
liabilities of N300 million. The company’s inventory (in millions) will be closest to:
A. N100
B. N300
C. N525
D. N400
19. A company adds several new projects that are riskier than its current mix of project.
This will tend to increase the company’s cost of:
A. Only Debt Capital.
B. Only Equity Capital.
C. Both Debt and Equity Capital.
D. Neither Debt nor Equity.
20. A security offers to pay you N5,000 annually from the beginning of year 11 to
infinity. If you require a return of 10% p.a., what maximum amount would you be
willing to pay now for the security?
A. N50,000
B. N19,277
C. N17,525
D. N30,723
21. A participating preference share is a preference share which
A. Entitles the holder to a fixed rate of dividend.
B. Has the right to convert into ordinary shares at some future date.
C. Entitles the holder to a share of residual profits.
D. Carries forward the right to preferential dividend if unpaid.
22. Which of the following is the distinguishing feature between commercial paper and
banker acceptance?
A. Discount Rate
B. Bank Guarantee.
C. Face Value.
D. Short term Securities.
23. Two projects have the following cash flows:
Time
Project A
Project B
0
100
-100
1
-275
300
2
300
-200
The internal rate of return (IRR) problem most likely to emerge with each project’s
cash flow is:
A. Both projects have a multiple IRR problem.
B. Project A has a multiple IRR problem, Project B has no IRR.
C. Project B has a multiple IRR problem, Project A has no IRR.
D. Both projects have no IRR.
24. Merton plc is currently considering a new investment project and uses the NPV
method for appraisal purposes.
Which one of the following items relating to the project should be included in the NPV
appraisal?
A. The payment of N30,000 for market research report, which was commissioned
last month and will be paid for next month.
B. The apportionment of fixed costs of N10,000 per year over the life of the project
to represent a fair share of the total fixed costs of the factory.
C. An offer of N100,000 to acquire raw materials that were due to be sold but which
will be used in the project if it goes ahead.
D. A depreciation charge of N10,000 per year over the life of the project for
machinery that will be used in the project.
25. Consider the following two statements concerning required rates of return:
I.
Required rates of return for preferences shares are normally higher than
required rates for ordinary shares.
II. Required rates of return for convertible loan notes are normally lower than
required rate of return for non-convertible loan notes.
Which of the following combinations (true/false) concerning the above statements is
correct?
Statement I
Statement II
A. True
True
B. True
False
C. False
True
D. False
false
26. Why are market values often used to compute the weighted average cost of capital?
A. It is because securities are issued at market value and not at book value.
B. It is simpler to calculate market values than to calculate book values.
C. This is a very common mistake, especially because market values are much
more volatile.
D. This is in line with the goal of maximizing shareholder value.
27. Lefkas Co has a required rate of return, expressed in money terms, of 15%. The rate
of inflation is 4% per year. What is the required rate of return expressed in real
terms?
A. 10.4%
B. 10.6%
C. 11.0%
D. 11.5%
28. Samara Co, a large conglomerate with businesses in a variety of different sectors, is
considering a bid by some of its management to acquire one of its manufacturing
businesses. The senior managers in charge of the manufacturing business would
leave Samara Co in order to run that business as an independent company.
Which of the following terms would best describe this?
A. A divestment.
B. A demerger.
C. A spin-off.
D. A liquidation.
29. The process of transforming otherwise illiquid financial assets into marketable capital
market instruments is known as:
A. Securitization.
B. Dematerialization.
C. Credit enhancement.
D. Unbundling.
30. Koko Co, a listed company, is considering issuing additional equity capital. To ensure
that all the new equity shares are sold, Koko Co wants to gain assurance that any
shares not bought by the general public will be subscribed.
What term correctly describes a firm which agrees to subscribe for the equity shares
which are not taken up?
A. A sponsoring member firm.
B. An issuing house.
C. An underwriter.
D. An intermediary.
31. Dorsal Co intends to make a bonus issue of ordinary share during the forthcoming
year. Which one of the following will be affected as a result of the issue?
A. Financial gearing.
B. Total equity.
C. Earnings per share.
D. Liquidity.
32. Akika Co expects sales revenue N20 million for the coming year. It also aims to
achieve the following ratios: current ratio of 2.5:1; sales revenue to current assets of
4.1; and acid test ratio of 2:1.
Based on this, what will be the forecast inventory?
A. N1 million
B. N3 million
C. N4 million
D. N6 million
33. The sale of receivables and using the proceeds to pay off long-term debt can lead to:
A. An increase in the interest coverage ratio and a increase in the current ratio.
B. An increase in the interest coverage ratio and a decrease in the debt-to-equity
ratio.
C. A decrease in the interest coverage ratio and an increase in the debt-to-equity
ratio.
D. None of the above.
Equity Valuation and Analysis (34 - 67)
34. The required rate of return in a particular country depends on all of the following
except:
A. A country-specific risk component.
B. The risk-free rate.
C. The inflation rate.
D. A risk premium.
35. Treasury bills currently have a return of 3 percent and the market risk premium is 8
percent. If a firm has a beta of 1.6, what is its cost of equity?
A. 15.8%
B. 12.3%
C. 10.2%
D. 8.3%
36. An unquoted company cannot raise additional funds through which of the following
methods?
A. Prospectus issue.
B. Private placement.
C. Rights issue.
D. Retained earnings.
37. If an investor has determined that an asset’s market price was too high, (implying
that it will soon fall) the expected holding period return (HPR) would be:
A. Lower than the required return.
B. Equal to the required return.
C. Higher that the required return.
D. More information is needed.
38. A company expects to pay a dividend of N1.50 next year. If dividends grow at the
rate of 5 percent and KE equals 9 percent, what is the stock’s intrinsic value?
A. N25.00
B. N37.50
C. N40.00
D. N42.50
39. Which of the following factors can affect stock prices?
A. The national economy.
B. The political situation in the country.
C. Global macroeconomic factors.
D. All of the above.
40. Limited liability is often discussed as a reason to own ordinary shares. This means:
A. Stock value is guaranteed.
B. Ordinary shares have less risk than a bond held to maturity.
C. Ordinary shares always pay dividend.
D. Loss is limited to the amount of stock purchase price.
41. Given a 12 percent cost of equity, estimate the value of the firm’s equity based on
the free cash flow to equity (FCFE) model using the following cash flows:
•
•
•
Year 1: N100
Year 2: N100
Year 3: N1,100 (includes terminal values)
A.
B.
C.
D.
N951
N1,066
N1,300
N825
42. Which of the following will not cause an increase in the price/sales ratio, when
everything else is constant?
A. Decrease in risk.
B. Decrease in the payout ratio.
C. Increase in the profit margin.
D. Increase in the growth rate.
43. If an actual price to earnings (P/E) ratio for a firm is calculated using earnings from
the last 12 months, the ratio is referred to as the:
A. Trailing P/E ratio.
B. Forward P/E ratio.
C. Leading P/ ratio.
D. Historic P/E ratio.
44. Which of the following statements best characterizes defensive stocks?
A. Defensive stocks exhibit a low correlation with respect to movements in the
market.
B. Defensive stocks are conservative with respect to how much dividends they pay
out to shareholders.
C. Defensive stocks makes reference to how conservative a company is within an
industry, therefore, there is a conservative stock from every industry.
D. Defensive stocks generally have low market values.
45. Which of the following statements about the primary and secondary markets is not
correct?
A. A primary market is a market in which new securities are sold.
B. A secondary market is a market in which existing securities are traded among
investors.
C. The primary market benefits from the liquidity provided by the secondary
market.
D. The proceeds from a sale in the secondary market impact the liquidity of the
issuer.
46. Which of the following characteristics of a good equities market favour(s) investors?
I.
II.
III.
IV.
Availability of timely and accurate information.
Liquidity.
Large bid-ask spreads.
Rapid price adjustment to new information.
A.
B.
C.
D.
I and IV only.
II and III only.
I, II, and IV only.
All of the above.
47. A firm expects a profit margin of 5.2 percent, a total asset turnover 1.6 times, and a
debt ratio of 60 percent. The dividend payout ratio, which is expected to remain
stable, is 40 percent. The required rate of return is 16 percent. The firm’s justified
trailing P/E ratio is closest to:
A. 10.54
B. 11.43
C. 12.86
D. 17.14
48. An analyst estimates that XYZ’s earnings will grow from N3.00 to N4.50 per share
over the next eight years. What is the rate of growth in XYZ earnings?
A. 4.9%
B. 5.2%
C. 6.7%
D. 7.0%
49. A share of George Ltd preferred stock is selling for N65. It pays a dividend of N4.50
per year and has a perpetual life. The rate of return it is offering investor is closest
to:
A. 4.5%
B. 6.5%
C. 6.9%
D. 14.4%
50. Which of the following statements is not correct about bonus issue?
A. Theoretically, it should result in rapid increase in market price.
B. It amounts to capitalization of reserves.
C. It represents additional shares issued to an investor free in the proportion of
existing share holding.
D. Bonus issue does not result in cash outflow from the company.
51. When investors are pessimistic, the confidence index will do which of the following?
A. Increase.
B. Decrease.
C. Remain constant.
D. Increase sharply then decrease sharply.
52. Which of the following has not been an advantage of equities as an investment
vehicle over bonds in the Nigerian capital market over the years?
A. Greater liquidity.
B. Lower risk.
C. Higher returns.
D. Availability of a wider variety of instruments.
53. The market is expected to return 12 percent next year, and the risk-free rate is 6
percent Johnson Industries has a beta of 0.9. If Johnson’s share price is expected to
rise from N60 to N64 over the next year, assuming they pay a N2.00 annual
dividend, Johnson:
A. Is expected to yield less than the required rate of return, based on the capital
asset pricing model.
B. Is currently underpriced.
C. Is expected to yield exactly what it should be based upon the holding period
return and the capital asset pricing model.
D. Is, depending on shifts in the market risk premium and the risk-free rate, priced
correctly in the market.
54. Which of the following ratios will be least helpful when analyzing equity investments
aimed at generating dividend income in the next few years?
A. Return on equity.
B. Dividend payout ratio.
C. Earnings yield.
D. Stock turnover.
55. Firms with abnormally high return on equity (ROE) will probably do which of the
following?
A. Go out of business.
B. Payout all earnings in dividends.
C. Retain a large portion of their earnings.
D. Be indifferent between retention and payout.
56. IQ is a firm with a debt-to-equity ratio of 1.2. Without debt, the cost of equity would
be 12%. The cost of debt is 9%. What is the cost of equity for the levered firm if
there are no taxes?
A. 13.2%
B. 14.5%
C. 15.6%
D. 16.8%
57. Which of the following statements is/are true with respect to price-earnings (P/E)
multiples?
I.
As the growth prospects of a company increase, everything else constant, the
company’s P/E will also rise.
II. As the expected required rate of return of a company decrease, everything else
constant its P/E will also decrease.
III. During a period of decreasing interest rates, P/E ratios will generally decrease,
holding everything else constant.
A.
B.
C.
D.
I and II only.
I only.
III only.
None of the above.
58. Suppose a company’s share currently trades at N60. For next year a dividend of N
per share is forecasted. The shareholders require a rate of return of 6%. Applying a
dividend discount model, what is the company’s growth rate g?
A. g = -0.02
B. g = 0.01
C. g = 0
D. g = 0.6
59. You are provided with the following details:
D/E ratio = 0.35
Average interest rate (i) = 6.5%
Return on equity (ROE) =9%
What is the return on asset (ROA)?
A. 8.35%
B. 8.7%
C. 9.00%
D. None of the above.
60. Koko Ltd discloses the following data:
Current share price
ROE
P/E ratio
Dividend yield
Koko Ltd
N75
15%
15
5%
What is Koko’s estimated growth rate?
A. 2.85%
B. 3.75%
C. 7.35%
D. 11.25%
61. Low P/E ratios tend to indicate that a company will _______ ceteris paribus.
A. Grow quickly.
B. Grow at the same speed as the average company.
C. Grow slowly.
D. Not grow.
62. A dividend of N8 per share is expected one year from now on Company ABC’s stock.
The shares are currently trading at N200. Also, the market assumes that the
dividend will grow at a rate of 5% forever. What is the market’s required rate of
return on this investment?
A. 4%
B. 5%
C. 7%
D. 9%
63. The current P/E ratio of a stock is 14. Assume a cost of equity of 11%, a dividend
growth rate of 8.25% and a payout ratio of 25%. Assume neither new investment
nor change in net working capital. It can be concluded that:
A. The stock is undervalued.
B. The stock is fairly valued.
C. The stock is overvalued.
D. No conclusion can be made with the information given above.
64. All else equal, which of the following would likely be associated with a high growth
rate in earnings?
A. Beta = 1.
B. Low risk-free rate.
C. High retention ratio.
D. Low inflation rate.
65. An analyst is performing an equity valuation for a minority equity position in a
dividend paying multinational. The appropriate model for this analysis is most likely
A. FCFE model.
B. FCFF model.
C. Dividend valuation model.
D. Residual valuation model.
66. A firm currently has the following per share values:
•
•
•
Cash flow from operations (CFO) is N49.50
Capex is N40.00
Net borrowing is N7.50
What is the current per share FCFE?
A. N97
B. N17
C. N16.50
D. N19.50
67. The following data was available for Okay Plc for the year ended December 31,
2012:
Sales per share
= N150
EPS
= N1.75
ROE
= 16%
Cost of equity (r)
= 12%
If the expected growth rate in dividends and earnings is 4%, what will the
appropriate price-to-sales (p/s) multiple for the company?
A. 0.037
B. 0.114
C. 0.109
D. None of the above.
Fixed Income Valuation and Analysis (68 - 100)
68. Which of the following statements is most correct? Other things held constant.
A. The “liquidity preferences theory” would generally lead to an upward sloping
yield curve.
B. The “expectations theory” would generally lead to an upwards sloping yield
curve.
C. The yield curve under “normal” conditions should be horizontal (i.e. flat).
D. A downward sloping yield curve would suggest that investors expect interest
rates to increase in the future.
69. To
A.
B.
C.
D.
earn a high rating from the bond rating agencies, a firm should have:
A low times interest earned ratio.
A low debt to equity ratio.
A high quick ratio.
(B) and (C) above.
70. A non-refundable bond can be called only:
A. If interest rates fall.
B. If lower cost debt is used to make the call.
C. As long as lower-cost debt is not used to fund the call.
D. None of the above.
71. A portfolio manager is considering the purchase of a callable bond. The bond’s issuer
will likely call the bond if interest rates;
A. Rise which will be advantageous to the portfolio manager.
B. Fall which will be disadvantageous to the portfolio manager.
C. Remain flat which will be disadvantageous to the portfolio manager.
D. Information on duration needed.
72. Call options and convertible provisions can have the following potential impact on
bondholders:
A. Convertible provisions benefit the bondholder but call options do not.
B. Call options benefit the bondholder but convertible provisions do not.
C. Both call options and convertible provisions do not benefit the bondholder.
D. Both are beneficial to the bondholder.
73. Which of the following is not a provision for the early retirement of debt by the
issuer?
A. A conversion option.
B. A call option.
C. A prepayment option.
D. A sinking fund.
74. A mortgage is typically not:
A. A collateralized loan.
B. Subject to early retirement.
C. An amortizing security.
D. Characterized by highly predictable cash flows.
75. If interest rate volatility increases, which of the following bonds will experience a
price decrease?
A. A callable bond.
B. A Putable bond.
C. A zero-coupon, option-free bond.
D. An option-free, 4% coupon bond.
76. A floating-rate security will have the greatest duration:
A. The day before the reset date.
B. The day after the reset date.
C. Just prior to maturity because that is the largest cash flow.
D. Never-floating-rate securities have a duration of zero.
77. Which of the following securities will have the least reinvestment risk for a long-term
investor?
A. A 10-year, zero-coupon bond.
B. A 6-month T-bill.
C. A 30-year, payable amortizing bond.
D. A 10-year, 4% debenture.
78. Which of the following is a method of Federal Government of Nigeria (FGN) bond
issuance in the primary market?
A. Offer for subscription.
B. Offer for sale.
C. Auction.
D. Public offer.
79. Compared to a public offering, a private placement of debt securities likely has:
A. More liquidity and a lower yield.
B. More liquidity and a higher yield.
C. Less liquidity and a lower yield.
D. Less liquidity and a higher yield.
80. Which of the following statements most accurately describes the relationship
between the economic health of a nation and credit spreads?
A. Credit spreads and economic well-being are not correlated.
B. Credit spreads decrease during an expanding economy because firms cash flows
are expected to rise.
C. Credit spreads increase during an expanding economy because firms invest in
more speculative projects.
D. Credit spreads increase during an expanding economy because firms are
expected to have volatile earnings.
81. An analyst observes a 5-year, 10% coupon bond with semiannual payments. The
face value is N1,000. How much is each coupon payment?
A. N50
B. N25
C. N500
D. N100
82. A bond with face value of N1,000 has coupon rate of 10% and matures in five years,
with a yield to maturity of 15%. If coupons are paid on semi-annual basis, what is
the price of the bond?
A. N832.39
B. N749.06
C. N828.40
D. N830.45
83. The 4-year spot rate is 9.45% and the 3-year spot rate s 9.85%. What is the 1-year
forward rate three years from today?
A. 0.400%
B. 9.850%
C. 8.258%
D. 11.059%
84. A 10-year bond pays no interest for three years, then pays N229.25 followed by
payment of N35 semi-annually for seven years and an additional N1,000 at maturity.
The bond is a/an __________
A. Accrual bond
B. Zero-coupon bond.
C. Deferred coupon bond.
D. Step-up bond.
85. A bond’s nominal spread, zero-volatility spread, and option-adjusted spread will all
be equal for a coupon bond if:
A. The coupon is low and the yield curve is flat.
B. The yield curve is flat and the bond is not callable.
C. The bond is option free.
D. The coupon is high, the yield curve is flat, and the bond has no embedded
options.
86. In the fixed income market, price risk and re-investment risk:
A. Act in opposite direction.
B. Act in the same direction.
C. Act independently.
D. Act in direction that cannot be predicted.
87. If the nominal yield spread is computed as the difference in yield-to-maturity of a
callable corporate bond less the yield-to-maturity of a comparable maturity Treasury
bond, the nominal spread will:
A. Overstate the attractiveness of the corporate bond.
B. Understate the attractiveness of the corporate bond.
C. Be less than the bond’s options adjusted spread (OAS).
D. Equal the bond’s OAS.
88. Which theory regarding the yield curve allows the derivation of forward rates directly
from spot rates?
A. Pure expectations theory.
B. Liquidity preference theory.
C. Market segmentation theory.
D. All of the above.
89. An arbitrage trader observes that the price of a coupon-bearing Treasury bond is less
than the value of zero-coupon Treasury securities that could be created from it. The
trader could profit from this by:
A. Buying and selling the bond in a repurchase agreement transaction.
B. Buying the bond, stripping it, and selling the pieces.
C. Selling the bond because it is overvalued.
D. Buying the bond because it is overvalued.
90. The duration of a bond portfolio is:
I. The weighted average of the durations of the individual bonds.
II. The arithmetic average of the times at which the cash flows of the portfolio
occur.
A.
B.
C.
D.
I only.
II only.
All of the above.
None of the above.
91. Which of the following statements is (are) true?
I.
Higher rated bonds will be traded at higher yields compared to lower rated
bonds.
II. Callable bonds will be traded at lower yields than similar quality non-callable
bonds.
A.
B.
C.
D.
I only.
II only.
All of the above
None of the above.
92. The ____________ is the lowest yield from among all possible yield to calls, yield to
put, and the yield to maturity.
A. Realized yield.
B. Yield to worst.
C. Bond equivalent yield.
D. Cash flow yield.
93. Which of the following ratios is a leverage ratio?
A. Return on assets (ROA).
B. Return on equity (ROE).
C. Fixed charge coverage ratio.
D. Fixed asset turnover.
94. The coupon rate of a bond is:
A. The interest rate that the issuer agrees to pay each year.
B. The amount the issuer agrees to repay the bondholder by the maturity date.
C. The number of years over which the issuer has promised to meet the conditions
of the obligation.
D. Equivalent to the par value of a bond.
95. Bonds A and B are 2-year bonds with the same characteristics. They only differ from
each other by the coupon they pay: bond A pays an annual coupon of 8%, bond B an
annual coupon of 7%. If the zero coupon yield curve is upward sloping, then with
YTM = yield to maturity:
A. YTM of bond A > YTM of bond B.
B. YTM of bond A < YTM of bond B.
C. Not enough information to answer.
D. None of the above.
96. Which of the following would be classified as a restrictive covenant?
A. Maximum dividend payout ratio of 20% should be maintained.
B. Maintain a satisfactory working capital ratio (or current ratio).
C. Provide audited financial statements on a timely basis.
D. Use the loan prudently for the agreed-upon purpose.
97. When interest rates decline, the duration of a 30-year bond selling at a premium:
A. Increases.
B. Decreases.
C. Remains the same.
D. Need to know the coupon rate.
98. Which of following statements is wrong?
A. The price of a bond changes in the opposite direction from the change in yield
required by investors.
B. The price of a bond is equal to the present value of all the promised payments
that is the coupon interest and principal discounted at the yield to maturity.
C. A coupon-bearing bond can be visualized as a return as a stream of future cash
flows which can be replicated by a portfolio of zero-coupon bonds.
D. The price of a bond is an inverse linear function of the yield to maturity required
by investors.
99. A 10-year, 8% coupon bond has a price of 97.21 of 100 par. If its effective duration
is 4.9 and the yields increase by 0.55%, what is the approximate percentage price
change for this bond?
A. -1.72%
B. 1.72%
C. 4.90%
D. -2.70%
100. The Debt Management Office was established in Nigeria to regulate the activities of
__________
A. Primary Dealers and Market Makers (PDMM) in FGN bonds.
B. Issuing houses.
C. NSE appointed market makers.
D. Dealers in AMCON bond.
Total = 100 marks
FORMULAE
Levered/unlevered beta:
Annuities:
Yield to maturity of a bond:
Valuation of perpetual bonds:
Price change approximated with duration:
Portfolio duration:
Macaulay duration: